"Raise or Hold in September... Powell Ambiguous, Unwilling to Provide Forward Guidance (Comprehensive)"

The U.S. central bank, the Federal Reserve (Fed), has implemented a 'baby step' by raising the benchmark interest rate by 0.25 percentage points as expected. This marks a resumption of rate hikes just one month after a pause for 'catching breath.' With the upper bound of the U.S. benchmark interest rate soaring to 5.5%, market attention is focused on the next step. Fed Chair Jerome Powell has left open both the possibility of a rate hike and a pause in September. Ultimately, the message is that it depends on future economic indicators, including inflation.

[Image source=AP Yonhap News]

Fed Raises Rates by 0.25% as Expected... Highest Since 2001

On the 26th (local time), following the July Federal Open Market Committee (FOMC) regular meeting, the Fed announced in its policy statement that the federal funds rate would be raised from the previous 5.0?5.25% range to 5.25?5.5%. As a result, the U.S. benchmark interest rate has surged to its highest level since 2001. This marks the 11th rate hike since the Fed began its rate-hiking cycle in March last year. After raising rates ten consecutive times, the Fed unanimously decided to pause at the June FOMC meeting to assess the cumulative effects of tightening.

The baby step decision on this day was also unanimous. The FOMC stated, "Recent indicators suggest that economic activity is expanding at a more moderate pace than before," and added, "When determining the appropriate range for additional policy firming to return inflation to the 2% target, we will consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and economic and financial conditions." The wording in the policy statement was largely similar to the previous month. The phrase 'additional policy firming' was also retained.

At the subsequent press conference, Chair Powell was asked about the possibility of a rate pause in September. He replied, "We will be asking the same question at every meeting," and said, "No decisions have been made regarding future meetings, including the pace of rate hikes." He explained, "If the data supports it, it is possible to raise rates at the September meeting," and "Depending on the data, rates could also be held steady." Since many key economic indicators are scheduled to be released over the roughly two months until the next FOMC meeting, the plan is to make real-time decisions based on the data at that time.

Regarding why rates were raised despite clear signs of easing inflation in June's data, Powell said, "It is just one data point," and emphasized, "We must not let our guard down on inflation." He noted, "The June Consumer Price Index (CPI) was very good news," but assessed, "Although inflation has eased, there is still a long way to go." He explained that the full effects of tightening have not yet been confirmed.

When asked if the tightening cycle could end if the trend confirmed in recent CPI data continues, Powell responded, "Depending on the data, rates could be raised or held steady." He described the baby step as "the necessary direction." He also said, "As we approach the terminal rate, we will slow the pace," but refrained from making specific comments, stating, "I do not want to provide too much forward guidance." However, he also indicated that the possibility of consecutive hikes in July and September remains on the discussion table.

[Image source=Reuters Yonhap News]

"Not Hawkish, Nor Dovish"?Ambiguous Powell Leaves All Possibilities Open

Ahead of the July FOMC, market attention was focused on Chair Powell's remarks. Since the baby step scenario was already considered likely, there was speculation that hints about future monetary policy could be found in Powell's press conference. Given the clear easing in inflation indicators, including recent CPI data, expectations had spread that the Fed's tightening cycle could end early with just one more rate hike this month.

However, Powell's tone on the day was assessed as neither hawkish (favoring tightening) nor dovish (favoring easing), but rather "hawkish-dovish" (a blend of hawk and dove). This policy ambiguity was clearly reflected in Powell's statement at the press conference that "I do not want to provide too much forward guidance." When asked whether there was any discussion of a pause at this meeting, he replied, "There are always multiple views," and advised, "Check the minutes released in 2?3 weeks."

Quincy Crosby, Chief Strategist at LPL Financial, mentioned the possibility of further hikes but described the tone of the policy statement as neutral rather than hawkish or dovish. Anna Wong, Chief Economist at Bloomberg Economics, analyzed, "The lack of substantive changes in the policy statement suggests that most officials still want to keep the possibility of another rate hike open," but noted, "Powell's somewhat dovish tone at the press conference indicates a willingness to skip a rate hike if inflation indicators continue to ease." Michael Feroli, Chief U.S. Economist at JPMorgan, emphasized, "The clear message is that decisions will depend on the data."

Some also interpret this policy ambiguity as evidence that the Fed's tightening is nearing its end. Francis Donald, Global Chief Economist at Manulife Investment, said, "The Fed has been in a prolonged 'hawkish hold' state," and assessed, "Powell has no choice but to maintain the threat of rate hikes to prevent the market from prematurely expecting cuts and raising inflation expectations." The Wall Street Journal (WSJ) also interpreted, "The Fed may have no reason to raise rates again," but "there is no reason to say that now."

Investment banks such as Wells Fargo, Goldman Sachs, and Morgan Stanley maintained their view that this month's rate hike could be the last. Wells Fargo predicted, "With rates above 5% and ongoing balance sheet reduction, core inflation is slowing," and concluded, "Further tightening will be difficult."

On this day, Powell once again drew a line against the possibility of rate cuts within the year. He also mentioned that inflation is unlikely to fall to the 2% price stability target by 2025. He reaffirmed the view that below-trend growth and labor market easing are necessary for price stability. Additionally, he reiterated the possibility of a soft landing scenario for the U.S. economy. Powell is expected to publicly share the Fed's message on future rate decisions at the Jackson Hole Symposium at the end of next month, ahead of the September FOMC.

Maximum 2%p Interest Rate Gap Between Korea and U.S.... New York Stock Market Closes Mixed

With the U.S. upper bound interest rate soaring to 5.5%, the interest rate gap with Korea has widened to a record high of 2.0 percentage points. Given that such a reversal magnitude is unprecedented, concerns have been raised about foreign capital outflows and increased volatility in the foreign exchange market. This could also pose a burden on the Bank of Korea, which has kept rates on hold for four consecutive times from February to this month.

The three major indices of the New York stock market closed mixed as they digested the FOMC results and Chair Powell's remarks. The Dow Jones Industrial Average, composed of blue-chip stocks, extended its rise for the 13th consecutive trading day. In contrast, the large-cap-focused S&P 500 and tech-heavy Nasdaq indices closed slightly lower. U.S. Treasury yields also declined in the New York bond market. This week, the Fed's preferred inflation indicator, the Personal Consumption Expenditures (PCE) price index, will also be released. The core PCE price index is expected to have risen 4.2% year-over-year, slowing from the previous month’s 4.6%.

This content was produced with the assistance of AI translation services.